Coromandel International: Buy :: Business Line

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The stock of the country’s leading fertiliser maker Coromandel International has gained about 60 per cent since our recommendation last May.

At the current price of ₹283, the stock trades at 12.4 times its 2015-16 estimated earnings, closer to the upper end of its historical trading band of 10-12 times.

A moderation in the phosphatic fertiliser inventory with dealers, improved availability of phosphoric acid from its joint venture company, Tifert, and fall in prices of key inputs such as ammonia augur well for the company.

However, depreciation of the rupee against the dollar may be a risk to the company’s earnings, given its high import dependence for sourcing key raw materials.

Given the company’s healthy long-term prospects, investors with a three to five year investment horizon can buy the stock. Reduction in the complex fertiliser inventory with dealers should help Coromandel clock higher sales in 2014-15. From about 45 lakh tonnes in early 2013-14, the inventory of di-ammonium phosphate fertiliser (DAP) with the dealers fell to about 20 lakh tonnes by end of June.

Coromandel’s own manufactured fertiliser sales (volume) grew 16 per cent in the June quarter, a tad lower than expectation, given the low base of the previous year. This was primarily on account of delay in the monsoon pick up this year as against a normal rainfall in the previous year. However, a recovery in rainfall by end July should help Coromandel’s performance in the September quarter.

Boost to production

Further, the supplies of phosphoric acid from Tifert, which is a three-way joint venture between Coromandel International, GSFC and two Tunisian state-owned companies which commenced last year.

This should enable the company improve its complex fertiliser production and sales in 2014-15.

Coromandel’s fertiliser production during the June quarter stood at 4.59 lakh tonnes, 42 per cent higher than the 3.23 lakh tonnes produced during the same period last year.

Healthy performance by its non-subsidy businesses, particularly crop protection (Ankleshwar facility), and subsidiary Sabero Organics helped Coromandel reduce dependence on Government subsidy.

Diversified operations help

Total revenue from Coromandel’s non-fertiliser businesses accounted for almost a fourth of its consolidated revenues.

These businesses being more profitable than its traditional fertiliser segment, the operating profit contribution from non-fertiliser products accounted for almost 40 per cent of the company’s consolidated operating profit as of June quarter.

Softer crude prices in the international market will benefit Coromandel’s operating margin.

A moderation in the price of ammonia, a key input used to manufacture complex fertiliser, will have a positive rub off on Coromandel’s profitability.

However, rupee volatility against the dollar remains a risk. Given that the company imports bulk of its raw material — ammonia, phosphoric acid, rock phosphate, sulphur and potash — depreciation of rupee against US dollar may impact its operating profit margin.

Coromandel’s revenues grew by a modest 3 per cent in the June quarter to ₹1,686 crore. However, its operating margin improved from 5.2 per cent last June to 5.8 per cent this year.

The company also repaid debt of ₹579 crore as of March 2014; total borrowings as a percentage of shareholders’ funds stood at 0.6 times.